Q1 performance to help Infy beat FY14 guidance

The quarterly commentary from the top management of Infosys remains cautious, but the there's no doubt the team is "enthused and energized." Even though the company's newly-minted chairman Narayana Murthy did not address analysts or the media, the first quarter numbers are reminiscent of his "under-promise and over-deliver" credo.

After issuing a rather wide band of revenue growth guidance (six-10 per cent) last quarter, it is now apparent the company in all probability would beat the six per cent revenue growth estimate in FY14 because the company has surprised the market with a sequential revenue growth of 2.7 per cent ($1.99 billion) in dollar terms and 3.4 per cent in constant currency. The strong revenue growth has been driven by a strong four per cent volume growth. This volume uptick is a result of recovery in the application development and consulting revenues. Infosys is back in the bread and butter application and maintenance business and the deal renewal market.

While the management believes it continues to face headwinds, the numbers indicate the sequential contraction in revenues might be over. Despite the strong first quarter show, the company has not revised its full year revenue guidance range from the six-10 per cent. What this implies is the company's sequential revenues would contract by one per cent for the next three quarters if it meets the lower end of the guidance. In order to grow full year revenues by 10 per cent, however, the company's quarterly run-rate has to be 1.5 per cent. Analysts believe the company would do better than six per cent for sure. Bhuvnesh Singh of Barclays believes some parts of Infosys' new strategy are working, although numbers could remain volatile in the near-term.

Analysts say the bump up in revenue growth during this quarter too has come from Lodestone. Revenues of Lodestone have growth at 30 per cent quarter-on-quarter to $90 million. According to Infosys CEO, S D Shibulal, three factors have contributed to this growth -- integration, accounting related shift and business growth. However, neither the company nor the market are looking at extrapolating this growth and increasing the full year's revenue growth guidance range from six-10 per cent levels. Going by the decline of the rupee, earnings estimates in rupee terms might be increased by a couple of points.

Analysts expect the company to report revenue growth of one-1.2 per cent over the next three quarters. While the company has not increased its full year guidance, D Shibulal conveyed to analysts that in constant currency the company's revenue growth for the full year would be in the range of seven-11 per cent. Rumit Dugar of Religate Institutional Research says: "While the macro picture remains mixed, we believe the guidance factors in a very conservative picture and presents a possibility for Infosys to deliver growth ahead of guidance."

Other indicators don't look as promising, however. Rajeev Bansal, chief financial officer of Infosys expects an impact of 300 basis points on the operating margin next quarter, which would offset the earnings uptick from a falling rupee. The cautiousness is evident in other aspects too. While the company has reported seven large deal wins in Q1, of which some are $100 million in size, it does not expect all of it to flow into revenues over the next few quarters as deal ramp ups might take time. Overall, the company and its subsidiaries added 66 clients during the quarter. The net profit growth, however, continues to be muted for a number of reasons. For the quarter ended June 2013, net profit in dollar terms declined 5.9 per cent sequentially to $418 million and remained flat year-on-year. Despite the sharp fall in the rupee, the company's operating margins have stayed flat sequentially at 23.5 per cent. The management conveyed to analysts in a conference call that it expects operating margins to be impacted by 300 basis points as due to the impact of wage hikes.